Compliance with Government Regulations

Assuring Proper Labor and Employment Practices

What government regulation typically apply to employment?

The discussion below identifies factors that are generally significant in labor and employment practices of liberal democracies countries. Labor and employment practices of socialist or dictatorial regimes are outside of the scope of this summary. Even among liberal democracies, there are significant differences at the national and local levels. Accordingly, the following analysis should be used more as a roadmap for further investigation, than as a final plan for execution.

A Water Fund that is organized as an independent entity is more likely to have its own employees than a water fund that is the initiative of a another non-profit entity, or a contractual arrangement among governments or other parties. A water fund that chooses to hire employees should research local law and pay attention to applicable tax and accounting requirements. For example, many jurisdictions require “withholding at the source,” which obliges an employer to withhold income taxes from an employee’s pay and remit them directly to the government. Many liberal democracies impose social welfare taxes on an employee’s wages, which the employer must collect or pay. In certain situations, failure to do so will cause the employer to be liable to pay the taxes. Employers may have obligations to provide sick pay, vacation pay, worker’s compensation insurance, unemployment insurance, health insurance, pension contributions, or other benefits to employees.

Bear in mind that the act of hiring employees may make a water fund subject to local laws, taxes, and even lawsuits, by creating “nexus” with the jurisdiction where the employees work. Once nexus is established, a water fund can be subject to regulations such as income and sales tax reporting, even if the water fund itself is organized and funded from elsewhere. Generally speaking, the location of where work is performed controls which jurisdiction’s labor laws apply. So-called “choice of law” provisions in a contract that state that the laws of a different jurisdiction apply are often unenforceable.

Some jurisdictions, such as the United Kingdom, require a written employment agreement with employees. Depending on the number of employees hired and the conditions of employment, a water fund might want to consider whether they might unionize.

What are the differences between employees and contractors?

In general, fewer government regulations apply to independent contractors than apply to employees. Some jurisdictions, such as the State of California, may have filing requirements, such as the DE-542 required by California’s Employment Development Department.

The United States Internal Revenue Service requires an annual filing by anyone who pays more than $600 to an independent contractor in a calendar year, Form 1099 MISC. Other jurisdictions may have similar requirements. It is important to comply with these requirements not only to reduce risk of penalties, but also to provide evidence that the relationship is, in fact, an independent contractor relationship.

Some sort of formal contract lies at the heart of every independent contractor relationship. It is important that the contract expressly identifies the independent contractor relationship and its key consequences; for example, that the worker is responsible to report and pay his or her own taxes, that no benefits are provided, and that the relationship is finite in scope and duration. Depending on the services provided, it may be appropriate to require the independent contractor to provide evidence of liability or other insurance coverage. If the independent contractor retains staff, the water fund will want to verify that the independent contractor is itself compliant with applicable labor laws. The water fund may want to include provisions addressing confidentiality and assignment of intellectual property by the independent contractor. The contract should not require an exclusive relationship, which is inconsistent with independent contracting. It may, however, restrict solicitation of employees or relationships with competitors.

Return to Legal Aspects of Launching a Water Fund.